Brown bursts Sipps bubble

THE great Sipps bubble appears to have burst following a change in the rules announced by the Chancellor today.

Homeowners considering buying second properties to take advantage of tax breaks under Self Invested Personal Pensions (Sipps) after pensions simplification on 6 April 2006 have suffered a major blow.

The new Sipps rules announced by Gordon Brown in his Pre-Budget Report now exclude all residential investment properties along with other assets such as fine wines, antiques and racehorses.

The news brought a swift and furious response from pensions industry professionals. Jerome Melcer, actuarial director at BDO Stoy Hayward Investment Management, said: 'Gordon Brown has made an enormous U-turn on Sipps that has wasted thousands of hours of professional time.

'An entire industry has been set up to deal with property-based Sipps and now it's all been canned.

'Having said that, this is where we should have been heading all along. The Government has finally realised that investment in residential property created enormous complexity not just for themselves but also the pensions industry and now they've stripped it out entirely.

'Now, less than four months to A-Day, people have already taken action to change pension arrangements, including irrevocable decisions over pension transfers and large new contributions. These individuals will have incurred professional fees and other costs in pursuing a strategy that is no longer viable.'

Melcer added: 'Luckily there is protection for people who have already committed to buy residential property with their Sipp as their investment is protected but for anyone else trying to get involved there will now be swingeing tax penalties for doing so.'

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, says: 'We had already predicted that this loophole could be closed, although those who have already acquired such assets to provide income for this future could now end up paying the cost.'

He added: 'It had seemed unlikely that the Government intended to help fund second homes in the UK, the south of France or the Costas at the expense of other taxpayers or the Treasury.'

In documents released to coincide with today's Pre-Budget Report, the Treasury said: 'A small part of the proposed [pensions] simplification would allow all registered pension schemes to invest directly in residential property.

'To prevent the potential abuse of the simplification rules, where people could claim tax relief in relation to pension contributions into Sipps for the purpose of funding purchases of holiday and second homes for their or their family's personal use, from 6 April 2006 Sipps and all other forms of self-directed pensions will be prohibited from obtaining tax advantages when investing in residential property, and certain other assets such as fine wines.

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'This action will ensure that tax relief is only given to those whose purpose in making the contribution is to provide themselves with a secure retirement income. However, the Government remains committed to encouraging investment in a range of assets as part of pensions saving and is therefore minded to allow Sipps to invest in genuinely diverse commercial vehicles that hold residential property, such as the proposed Real Estate Investment Trust model.

'The Government will not hesitate to take action if it becomes clear that people are trying to use collective vehicles to get around the rules for prohibited assets.

'In addition, the Government will take action to prevent abuse of the rules for tax-free lump sums from 6 April 2006, by removing tax advantages when lump sums are recycled back into funds in order to generate artificial levels of tax relief. The Government will also introduce a small package of supplementary measures to ensure the pension tax rules operate as intended.'

The Treasury statement added: 'The Government will bring forward legislation in the Finance Bill to clarify how inheritance tax will apply to choices under the new pension scheme rules, with effect from 6 April 2006. Further details will be announced in the New Year.'

Stuart Law, managing director of property investment specialist Assetz, said the Chancellor had performed a quite remarkable U-turn. He said: 'The majority of enquiries we were receiving were related to holiday home purchases and whilst many of these had an element of investment about them, it was clear that the suitability of the properties as a pension asset to provide income in retirement was questionable.'

Jim Buckle, managing director of property website, propertyfinder.com said:
'On average, 15% of those looking to buy property on our website are doing so for investment purposes and there has been a bit of a buzz about property in key holiday locations in the UK as people anticipated being able to put a holiday home in a Sipp.

'The changes the Chancellor has announced will certainly cool the increased interest we have noticed in these areas and take some of the shine off next year's summer holidays.'

Frank Williamson, managing director of PKF Financial Planning Ltd, said the change of policy was alarming: 'The Chancellor has, for the second time in 10 days, undermined confidence in pensions. His advance criticism of the Turner report last week and today's removal of the widely talked about tax advantages when investing in residential property through Sipps will leave many people wondering what is going on.'

Liberal Democrat Work and Pensions spokesman Danny Alexander said the Chancellor had at last seen sense. 'Liberal Democrat MPs have been campaigning against these proposals for two years and the Treasury has now recognised that we were right that these plans threatened rural communities. The idea that the Government should give tax breaks for second-home ownership always was absurd.'

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